| Abstract: | A theoretical view of the real rate of interest, such as isprovided by models of economic growth, is presented. That questionis of compelling interest, even though the issues are so long-runas to be of little practical importance. Models reviewed includethe Solow model, and its disaggregated extension by Stiglitz;endogenous growth models; the Ramsey model; and the Diamondcapital model. All these models are less than fully adequateto answer key questions. Solow-type models are good at demonstratingthe influence of grand changes, such as alterations in savingrates, or demographic changes. However key variables - particularlythe saving rate - are treated as constants. The Ramsey model,on the other hand, assumes in effect that a major influenceon the real rate is a given impatience parameter. The Diamondmodel is ideal for economies dominated by pension fund saving,but does not describe any actual economy. |
